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Shareholder Activism

European Corporate Governance Alisa Tyagunova, Olga Tsilowa

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Agenda
1. Definition

2. Shareholder Activists
3. Subjects of Shareholder Activism 4. Methods of Shareholder Activism

5. Effects of Shareholder Activism
6. Case Study 7. Conclusion

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Definition
Shareholder activism refers to shareholders who claim their power as company owners in order to influence corporation‘s behaviour
http://www.ecgi.org/activism/

A continuum of responses to corporate performance
Sikavica K, Hillman A.

Hint: „Actions initiated by minority shareholders dissatisfied with the performance“
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Definition

Shareholder activists

Motivation

Methods

Effects

Case study

Conclusion

Main types of shareholder activists Institutional investors • Hedge Funds • Public and private Pension Funds • Unions • “Social investment” Funds (religious organizations or public policy groups) • Financial institutions • Insurance companies • Equity Funds • Other institutional investors Individual investors • Corporate gadflies • Other individual investors 4 Definition Shareholder activists Motivation Methods Effects Case study Conclusion .

Determinants When does the potential for shareholder optimism arise? Managers make decisions in their own interests Agency problems due to separation of ownership and control Board doesn’t fulfill its responsibility Dissatisfaction of shareholders 5 Definition Shareholder activists Motivation Methods Effects Case study Conclusion .

(2012) 6 Definition Shareholder activists Motivation Methods Effects Case study Conclusion . shareholder are sometimes pursue other goals than beneficial for the target firms. however. T. like social or that of corporate governance. Example: Limiting the control of managers causes costs (reduction of profits) Strand.Agency Theory Potential conflict of interests: • Managers acting in their interests even at the expense of shareholders • Asymmetry of knowledge Example: Executive compensation and privileges at the costs of shareholders Main concern of shareholders: to increase their value to achieve maximum investment returns • According to the theory rational shareholder will become active only if the expected benefits of activism exceed the expected costs of activism In the practice.

7 Motivation Methods Effects Case study Conclusion . M. S.. & Conyon. (2012).Options for dissatisfied shareholder Exit Voice Sell shares Legal intervention mechanisms Active Shareholder Loyalty Definition Shareholder activists No activities Thomsen.

Where is shareholder activism focused? o Companies that have experienced poor stock performance relative to their competitors o Companies with larger market capitalizations o Companies with a heavy concentration of institutional shareholders o Large firms that appear a lot in media o Companies with a high percentage of independent directors Copland. James R. Y.. M. Feyman. and O’Keefe. (2012)” 8 Definition Shareholder activists Motivation Methods Effects Case study Conclusion .

In which industries is shareholder activism focused? http://proxymonitor.aspx 9 Definition Shareholder activists Motivation Methods Effects Case study Conclusion .org/forms/pmr_02.

and other value-drivers looking to get the most out of their investments (Pozen.The subject of shareholder activism ( 1 st motive) “Value maximizers” Major group • Primarily target the poorly performing firms in their portfolio • Initiate necessary measures to put pressure on the management of such firms to improve performance enhance shareholder value achieve maximum investment returns Types of activists: Hedge funds.2003) 10 Definition Shareholder activists Motivation Methods Effects Case study Conclusion .

and societal expectations gain legitimacy as business actors Types of activists: Pension funds. informal codes of conduct. Energy sector.environmental issues Meyer and Rowan (1977).g. such as: culture. politics. DiMaggio and Powell (1983) 11 Definition Shareholder activists Motivation Methods Effects Case study Conclusion . law.The subject of shareholder activism ( 2 nd motive) “Social Policy” • Affects matters related to social responsibility and responsible corporate behavior Wish to comply with external normative pressures. “Social investment” Funds Where: e.

James R. T. L. management. Y. and Strand. and O’Keefe. M. (2012) 12 Definition Shareholder activists Motivation Methods Effects Case study Conclusion . and shareholders • Examine how independent a board is and how executives are compensated Example: Modification of rules for electing directors. separating the positions of chairman and chief executive officer Types of activists: Proxy advisory firms.The subject of shareholder activism ( 3 rd motive) „Corporate Governance Watchdogs“ Process-based: change the allocation of power among boards. L. Feyman. (August 2011) Copland.. even media organization could be added who report on the company Carleton (1998) Norden.

Methods File proxy proposals and vote at Annual General Meeting Engage in private negotiations with management Target the company via public media Sikavica K. 13 Definition Shareholder Motivation Methods Effects Case study Conclusion . Hillman A.

(2012). J. (2011) 14 Definition Shareholder Motivation Methods Effects Case study Conclusion .Proxy proposals and voting at Annual General Meeting AGM is a central battleground for shareholder activists Shareholder Proposals Voting on Management and Shareholder Proposals Strand. Sanberg. T.

D. C.and Malenko.. Van der Elst. Sandberg 15 Definition Shareholder activists Motivation Methods Effects Case study Conclusion . N.Shareholder Proposals Shareholder proposals … • formal communication channel between shareholders and management • document recommendation • governance and social proposal • strict restrictions and regulations for submitting • company can submit a No-Action request and exclude a proposal • Boards of Directors comment on the proposal in the proxy materials • are usually very costly • vast majority are non-binding Levit.

C. voting on shareholder proposals non-binding • question and answer period (Q&A) is a critical part of AGM Levit.and Malenko. shareholder proposal always fail • proxy battles are one of the most powerful instruments of activism • voting on management proposals is binding.Voting on Management and Shareholder Proposals Voting on Proposals… • primarily tool for activists to affect corporate decision-making • protest voting can lead to significant changes in corporate governance and strategy • general pattern: management proposals always pass. Sandberg J. Van der Elst. 16 Definition Shareholder Motivation Methods Effects Case study Conclusion . N.. D.

Effects of Shareholder Activism Shareholder activism is controversial Companies with active and engaged shareholders are more likely to be successful Active shareholders can improve corporate performance by better monitoring Disruptive. (2001) 17 Definition Shareholder Motivation Methods Effects Case study Conclusion . opportunistic. J. misguided action by active shareholders who lack the skills and the experience and follow their own benefits and agenda “Take the money and run“ Karpoff.

Effects of Shareholder Activism Shareholder Activism is very difficut to measure o problem to determine the outcome and attribute directly o problem to observe activism behind the scenes Voting outcome on shareholder proposals Changes in governance structure Stock market performance Positive changes in operating performance Changes in management Changes in investment decision Gillan and Starks. 1998 18 Definition Shareholder activists Motivation Methods Effects Case study Conclusion .

J.(2001) 19 Definition Shareholder activists Motivation Methods Effects Case study Conclusion . Karpoff.Effects of Shareholder Activism Empirical evidence is mixed Strong empirical evidences that activism is not positively correlated with organizational performance Mostly short-run effects Little evidence of improvement in long-term stock market performance or operating performance Governance proposals generally receiving higher level of support compared to social proposals Especially takeover related proposals receive greater support Gillan and Starks (1998) and (2000).

J. Smith. Michael P. Karpoff.Effects of Shareholder Activism Pros Active shareholders … o identify undervalued companies o help to ameliorate the incentive and control problems o play a role of “fire alarm“ and attract attention to critical issues o build pressure on management to make organizational changes o are reasonably successful in getting governance structure changes adopted o increase firm value by prompting specific actions (e. CalPERS effect) Gillan and Starks (1998) and (2000). (1996). (2001) 20 Definition Shareholder activists Motivation Methods Effects Case study Conclusion .g.

operations and values Definition Shareholder activists Gillan and Starks (1998) and (2000). Michael P. J. Smith. (1996). o may not correctly perceive the situation of the company o may neither have the skills nor the experience o can advocate value-decreasing policies o can pursue goals other than share value maximization o can be interpreted negatively by the market o are often driven by self promotion o consume firm resources o are ineffective and have negligible impact on policies.Effects of Shareholder Activism Cons Active Shareholder…. (2001) 21 Motivation Methods Effects Case study Conclusion . Karpoff.

Markus L.. thwarted a takeover bid by Deutsche Boerse for the London exchange and forced the resignation of two of its highest profile board members Huszar. (2007) 22 Definition Shareholder activists Motivation Methods Effects Case study Conclusion .London-based Hedge Fund founded by Chris Hohn in 2003 .Pioneer in Shareholder Activism in Europe TCI . as a small activist shareholder.Case Study TCI: .

What happend? • After the takeover plan became known. Markus L. (2007) 23 Definition Shareholder activists Motivation Methods Effects Case study Conclusion . Atticus. it called for an extraordinary general meeting and for the election of new supervisory board TCI started a huge riot against the takover deal and called other shareholder for its boycott • TCI. Lone Pine and others accumulated a stake in the company of up to 30% • They demanded to stop the takeover as it would not create shareholder value for the investors of Deutsche Börse • Instead they called for the share buy-back program and the paying of a special dividend • The CEO and the president of the supervisory board had to leave the company • Deutsche Börse initiated a large special dividend and share buyback program In 2004 Deutsche Börse planned a takeover of the LSE Abandonment of LSE acquisition Huszar. TCI increased their shareholdings step by step • As TCI became owner of 5% of the share capital..

How was it possible? Aggressive strategy Nonconsideration of shareholders‘ requirements and underestimati on of their power Systematic increase of stake Mobilization of other shareholders and acting in concert Skilful ussage of media 24 Definition Shareholder activists Motivation Methods Effects Case study Conclusion .

(2007) 25 . Markus L..What was their motivation? Hedge Funds as profiteers from rising share price of Frankfurter Börse or falling share price of LSE The active Hedge Funds had big stakes in the main competitor Euronext Symbolic signal for the power of shareholder in order to achieve more approval in future Value maximizers + Corporate Governance Watchdogs Huszar.

…very aggressive strategy of activists … doubtful motives of the activists … uncertainty about the advantageousness of the outcome • Public discussion about legal regulations for institutional investors 26 Definition Shareholder activists Motivation Methods Effects Case study Conclusion .Case assessment • The case of Frankfurter Börse and LSE was the first significant phenomenon of shareholder activism in Germany • Important symbolic meaning for the power of shareholder • Still very controversial due to ….

and not the interest of the company 27 (short-term horizon) Definition Shareholder activists Motivation Methods Effects Case study Conclusion .Conclusion Shareholder Activism remains a controversial topic • High costs. requirements and regulations limit the chances to become an “active shareholder” • Only large shareholder will obtain return that offsets the associated costs • Shareholder proposals often fail due to their non-binding character • Empirical evidence show a small impact of activism on the performance of the companies • Information asymmetry may lead to lack of understanding and thereby to “harmful” activism • Shareholder often don’t have the needed knowledge or experience • The most activists follow their own interest.

Conclusion HOWEVER.… • Shareholder activism helps to raise the awareness for critical topics • Shareholder activism can be a useful control instrument • The pure presence of activists can lead to better acceptance of shareholder needs by management Governmental Regulations Incentive scheme to attract shareholder to hold the shares longer Open communication in order to build trust between shareholder and management Private negotiations and proxy actions over public naming and shaming Informed shareholder 28 Definition Shareholder activists Motivation Methods Effects Case study Conclusion .

Thank you for you attention! 29 .

com/newsresources/Details. http://www. S.uk/about_6729036_agency-theory-corporate-governance. Hamburg. “Corporate Governance: Mechanisms and Systems” . “Rebellion der Kapitalanleger: Der Investorenaktivismus in Theorie und praktischer Anwendung“. Huszar. (2007).de/transparenz-fordert-aktionarsaktivismus/ 4.html 30 .. http://www.References Books: 1. (2012). Thomsen. http://www.ehow.edu/1426552/Changing_the_world_through_shareholder_activis m 2.ecgi. & Conyon. M.osler.com/tools-for-shareholder-activists/what-is-a-shareholderactivist-2 5. http://www. Diplomica Verlag GmbH 2.org/ 3. Internet sources: 1.aspx?id=3650 6. Markus L. http://www.co.academia.goingpublic. http://theshareholderactivist. London : McGraw Hill..

For presentation at the Corporate Governance and Praxis: International Seminar 6. Copland. Renneboog. Laura T. 227-252.R. Vol. pp. 2012) “Shareholder Rights and Shareholder Activism: The Role of the General Meeting of Shareholders”. (2008) “Towards a Behavioral Theory of Corporate Ownership and Shareholder Activism”. Roberts. No. Centre for legal policy at the Manhattan Institute 11. Smith. Y. Academy of Management Annual Meeting Proceedings References . 019/2011 7. University of Cambridge Working Paper No. pp. Gillan. 57. T. pp. ESRC Centre for Business Research. Laura T. Hendry. Jonathan M.P.. (2000) "Corporate governance proposals and shareholder activism: the role of institutional investors”. Strand. M. Stuart L.. (1998) “A Survey of Shareholder Activism: Motivation and Empirical Evidence” 9. Yafeh. Gillan. ECGI Finance Working Paper N°. 275/2010 12. Stuart L. Norden. and Strand. and O’Keefe. 2. A. Feyman.Law Working Paper No. & Starks. Peter G. 1 . Rock Center for Corporate Governance Working Paper No. Issue 3. A. Sanderson. Journal of Finance. Journal of Financial Economics. Yale. The Journal of Finance. Van der Elst. Karpoff. 311/2011 and Tilburg Law School Legal Studies Research Paper No. (July 2011) “Revisiting Shareholder Activism at AGMs: Voting Determinants of Large and Small Shareholders”. Levit. (1996) “Shareholder Activism by Institutional Investors: Evidence from CalPERS”. (October 2011) “Nonbinding Voting for Shareholder Proposals “.. Hillman. 10. Copenhagen Business School. and Hamdani. C. 8. James R. Barker. 37. 188/2012. shareholder value and the new shareholder activism”. Lars L. Centre for Corporate Governance. European Corporate Governance Institute (ECGI) Finance Working Paper No. C. PhD Thesis.. 275-305 5. A Report on Corporate Governance and Shareholder Activism”.Sikavica. Van der Elst. 14. 375-391 31 15. L. October 2011.and Malenko. “Less is More: Making Shareholder Activism a Valuable Mechanism of Corporate Governance”. Vol. and Starks. Michael P.. Szilagyi. Department of International Economics and Management. 297. (2012) “The Owners and the Power:Insights from Annual General Meetings”. (2012) “PROXY MONITOR. (10/09/ 2001) “The Impact of Shareholder Activism on Target Companies: A Survey of Empirical Findings”. R. Journal of Management & Governance. J. Therese (August 2011) “Shareholder Activism among Portfolio Managers: Rational Decisions or 15 Minutes of Fame? “. (December 2004) “Respoonsible ownership. (March 2010) “Shareholder Activism through the Proxy Process”. 4. CeRP Working Paper Series N° 12/01.Papers: 1.. Law School and National Bureau of Economic Research 3. J. R. D. 51. Y. N. (March 7. 2011). (October 10.. K. “Institutional Investors as Minority Shareholders” 13. Volume 15. ECGI .